No, You Don’t Own An ETF
By Roger Nusbaum, AdvisorShares ETF Strategist
Barron’s had a bunch of one liners and other nuggets to quickly review.
The first one was the mutual fund column titled Health-Care Funds Roar Back. Adviser Daniel Wiener is quoted as recommending “overweighting the (healthcare) sector with an overall allocation of 20% to 25%, which he says is in line with health care’s growing slice of the economy.”
The sector’s weight in the S&P 500 is currently 14%. An overweight to 20% is probably aggressive (I think it is) but 25% is a lousy idea in terms of maintaining a diversified portfolio. I have no quibble with how important the sector appears to be but there is a lot of precedent for running into trouble making overly large sector bets (energy in the early 80’s, the internet bubble and then financials nine years ago). If you think you are aggressive enough for 25% into a sector then you had better have something in mind for quickly cutting exposure if things go against the sector….like some sort of wildcard with the American Health Care Act.
There was an article about one of the publicly traded asset managers (naming names is complicated for compliance reasons). A reader shared that he owned one of this company’s energy sector ETFs in the comments section. No, he owned a closed end fund from a company with a similar name. The name mix up is one thing but not knowing the difference between a closed end fund and an ETF is problematic, potentially very much so. The CEF he owns just announced that 78% of its current “dividend” is actually a return of capital. An ROC does not have to be bad, but is something that someone who owns the fund should know and I am guessing he doesn’t.
The cover story was a roundtable The Future of ETFs. One of the participants was Jim Ross from State Street. I’ve mentioned before that Jim and I played on the same summer league baseball team coached by his brother Mike in 1980. Sometimes it is a very small planet.
Very early in the article Jim said “this is a pretty tired debate (active vs. passive). ETFs are thrown in on the passive side, yet they’re used for active implementation by probably more than 50% of the people using them.” In a similar vein, Tony Rochte from Fidelity added “this debate doesn’t even exist if you talk to a professional. Financial advisors view themselves as architects using building blocks, index products alongside actively managed funds.” Finally, from iShares Mark Wiedman; “We reject even the idea of active versus passive. All portfolios are active. How you build that portfolio is an active decision.”
It is good to see industry leaders realizing the need to move past this debate. For years, I have been saying that investors should choose the best tool they can find for each given exposure they want in their portfolio. Lately most of the online brokerages have cut their commission rates for equities and ETFs dramatically which means that investors, or their advisors, can access different types of exposures in an economically efficient manner that wasn’t possible when commissions were $15, or $30 before that.
The use of more, non-traditional exposures or narrower exposures is an active action, even with a passive vehicle.